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The fundamental question now being asked by the many foreign investors who have publicly announced their withdrawal from Russia in recent weeks (about 300 companies) is what will happen to their property in Russia. Most foreign investors were agitated by the news of the nationalization of property "abandoned" by them in Russia, followed by summons of employees of such companies to the public prosecutor’s office and the Bill "On External Administration for Legal Entity Management" introduced by the Government of the Russian Federation on March 8, 2022 (the "Bill"). However, as reported by the media, as a result, it was decided to elaborate it further on. Let's try briefly discuss in this review whether it is possible to put an identity sign between external control and declared nationalization.

Let us first deal with the entity in relation to which external administration can be introduced to manage such entity (the "External Management"). The Bill lists the following criteria among the characteristics of a Russian legal entity in respect of which External Management could be introduced:

•                it must be controlled by a foreign entity or foreign entities (including non-affiliated ones), or such foreign entity or foreign entities must own at least 25% (directly or indirectly) of the stock or shares of such legal entity; and

•                the book value of assets as of the last reporting date must be at least 1 billion rubles, or the average number of employees of such legal entity in the month preceding the application for the introduction of External Management must exceed 100 employees.

It is quite obvious that the Bill was written without detailed study and the spread of entities in respect of which External Management can be introduced from a staff of 100 employees to a book value of its assets of 1 billion rubles can cover a huge number of legal entities with foreign participation.

As to the grounds for the introduction of External Management, the Bill identifies:

1.             firstly, the actual termination of the management of the activities of a Russian legal entity by its CEO, other management bodies or participants/shareholders (the "Authorized Persons") in violation of the requirements of Russian law; or

2.             secondly, the accomplishment by the Authorized Persons of any actions that may lead to the bankruptcy or liquidation of a Russian legal entity, among which the Bill, for example, includes a public statement on the termination of its activities in Russia.

At the same time, the Bill separates the terms for introducing External Management, namely: on the basis of the actual termination of the management of the activities, given in paragraph 1 above, such a period will be 3 months and the Bill does not allow early termination of such External Management, and in the event of actions that can lead to the bankruptcy or liquidation (paragraph 2 above), such a period will be 6 months with the possibility of early the termination.

External Management is supposed to be divided between the State Development Corporation "VEB.RF" ("VEB.RF"), which will be responsible for the External Management of non-financial entities, and the State Corporation "Deposit Insurance Agency" that will be responsible for financial entities. Making of VEB.RF responsible for External Management certainly raises questions, since the functionality provided to this body at the moment, both in terms of Russian legislation and the actual activities carried out, is far from anything even remotely resembling to External Management.

Furthermore, a member of the board of directors (supervisory board) of a Russian legal entity or an authorized government body may initiate External Management on the basis of a decision of an interdepartmental commission, the creation of which is apparently expected at the federal level. At the same time, officials of ministries of the federal level or the public prosecutor have the right to apply to such an interdepartmental commission.

The decision on the implementation of External Management will be made by the court at the request of any member of the board of directors of the legal entity or the Federal Tax Service of Russia ("FTS"). FTS submits an application based on the decision of the interdepartmental commission under the Ministry of Economic Development (the Bill in article 10 refers to the Moscow Arbitrazh Court, but most likely it should be the Arbitrazh court at the location of the relevant Russian legal entity), which, at the same time as initiating the case, is obliged (judging by the wording) to take interim measures and, among other things, prohibits to conclude and terminate contracts, dismiss employees, dispose of stock (shares) of such legal entity.

The implementation of External Management implies the transfer of a Russian legal entity completely under the control of the external administration with the suspension of the powers of all its management bodies and the resolution of a number of issues, for example, the requirements of counterparties to change or terminate contracts, to the court level. The Bill provides the external administration with a fairly wide range of powers during the period of External Management, while liability for damages arises only in the event of intentional actions.

In the light of the statement provided by the Ministry of Finance of Russia, on March 15, 2022, regarding Russian legal entities that are subsidiaries of foreign companies which left Russia will be subject to "a special mechanism for accelerated bankruptcy, temporary management ... and sale to new owners", one should certainly pay attention to the articles 6 and 9 of the Bill. These articles actually refer to the transfer of the assets of a Russian legal entity owned by a foreign company that left Russia to another legal entity, the sole shareholder (participant) of which should be such Russian legal entity itself, with the subsequent sale of such a newly created legal entity with assets to a potential acquirer. At the same time, interestingly, the acquirer of stocks (shares) in such a legal entity is left "under supervision" of the external administration for one year with the possibility of "withdrawal" of the sold legal entity, in case of failure to comply with the conditions that were agreed upon at the time of its sale. The question arises of how this "new scheme" will work without abuse certainly remains an open question. It should also be noted that the Bill does not indicate whether the foreign investor will be paid at least some compensation for the seized property.

A number of state bodies have already started commenting on the Bill. So, for example, according to the Russian Union of Industrialists and Entrepreneurs, the provision on increasing the level of ownership from 25% to 50% should be considered. Besides, the discussion of the Bill also takes place against the backdrop of a statement by the representative of the Ministry of Economic Development of Russia that Russia is expecting the return of foreign investors, since "a significant proportion of foreign companies have decided to suspend their activities in Russia due to problems with logistics" and after reconfiguring the chains supplies, they will be able to return.

The Bank of Russia, in its turn, also proposes to create an "alternative mechanism" that would temporarily restrict the ability of foreign investors to use their stocks (shares), since they are now placed in a situation dependent on circumstances, which, according to the Bank of Russia, is apparently may change in the future, and such investors will want to return to Russia.

It is quite obvious that there are certain gaps in the present Bill, for example, there are "walking” provisions on who may be subject to External Management, the entire procedure for External Management and subsequent "nationalization" has not been thought out in detail, the procedure for settlements (if any) with foreign companies that "left" Russia and many others. Even a cursory glance at the Bill suggests that its pass with the idea embodied in it at the moment will lead to the nationalization of the property of foreign companies, which in turn will most likely cause a flurry of lawsuits against Russia from foreign investors.